Reserve Bank of India Governor Raghuram Rajan has yet again exhorted builders to reduce prices, after having cut the repo rate by 25 basis points earlier this month. He had argued along the same lines after his September 2015 rate cut of 50 basis points — essentially saying that even if home loans turn cheaper, builders must bring down prices for the consumer to be interested and the over 40-month inventory pile-up to reduce. There’s a flaw in the reasoning, though: builders are able to hold on to these unsold inventories precisely because of these lower interest rates, which, along with advance payment or ‘interest-free credit’ by buyers, make their costs manageable. In other words, the margins lost due to managing inventories are less than the possible losses due to a drop in price. With banks heavily invested in home loans — they account for one-sixth of gross bank credit and were up over 15 per cent in 2015-16, outpacing the 7.8 per cent overall growth in gross bank credit — they too would hardly like to see prices drop. They feel threatened by the prospect of defaults and poor asset recovery: What if overleveraged builders go belly-up and buyers lose jobs in a fragile economy? Rajan’s efforts to make demand and supply meet at an ‘affordable’ price, and without a hard landing, are unexceptionable. But the answer here is to implement the Real Estate (Regulation and Development) Bill, which was passed by Parliament a month ago but awaits Presidential assent. That will achieve a smoothening out of prices and practices in the sector better than Rajan’s pleas can.

Builders may have a point when they say that the cumbersome process of obtaining municipal approvals drives up their costs. But it is also a fact that they change their plans on a whim, complicating the clearances. The new law calls for full disclosure of clearances obtained before the ‘Real Estate Regulatory Authority’ to be formed at the State-level. By ensuring that 70 per cent of the funds for a project are locked up in an escrow account, the inventory costs of other projects managed by the same promoter are bound to rise; this will force a price correction. Delays in project completion will also result in penalties. But for all this to happen, the States must lose no time in setting up their regulators. A transparent industry will reward bonafide promoters.

The RBI should come up with a paper on the intricate workings of the sector. All that is in the public domain is an unconvincing housing index and a smattering of reports by consultants and sector experts. In the absence of authentic data on housing inventories and prices, which banks are best placed to provide, buyers are taken for a ride. A cleaner housing market, with a regulatory apparatus in place, will trigger the sort of price correction that Rajan is looking for.

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